Friday, April 16, 2010

Back to an inflation bet

I recently pointed out that real-time indicators are showing that the economy is rebounding. As the markets have rallied from the reflation trade, my inflation-deflation timer model moved from a "neutral" reading to an "inflation" reading last week, which would move the model portfolio from equities to a basket of commodities (see report here).

Ken Heebner buying inflation too
The model appears to be in good company as I see that Ken Heebner has also put on an inflation bet in his portfolio. Heebner is a portfolio manager with a terrific long term record (though he has struggled in the last couple of years). He has a "swing for the fences" style and tends to make big top-down bets.

I reverse engineered his macro bets and my analysis shows that Heebner has positioned his CGM Focus Fund portfolio for a commodity inflation environment. He is at an overweight position in Materials:

...and Energy:

By contrast, he is underweight in Utilities:

...and has an implicit short position in the US long bond:

Long commodities, short bonds and interest sensitives - that sounds like a commodity inflation bet to me.


keithpiccirillo said...

I suspected as much, when he harped on TCK and the met coal theme a couple quarters ago.
He vacillated between money centers and insurance for the longest time.
What would an implicit short long bond exposure mean, as he is a large cap growth fund manager with short options available?
In other words how does a fund manager limit drawdowns, or are they just at the mercy of the trend?

Cam Hui, CFA said...

An implicit short bond bet means that he tends to outperform the SPX when bonds fall and underperforms when bonds rise.